September 30, 2014

“America has to face the fact that we have not reformed our corporate tax laws.   We have the highest overall corporate tax rates in the world. And we are now the only OECD country that also taxes overseas earnings on the difference between what the companies pay overseas and what they pay in America.” – Bill Clinton, 9/23/2014

Whether it is a Republican or Democrat lawmaker, you will now hear them say that our corporate tax system needs to be reformed.  The problem is that the two sides can’t come to terms on how to do it.  Republicans want corporate tax reform but they don’t want to put restrictions on executive pay.  Democrats don’t want to be perceived as helping corporations – especially corporate executives.  There is an answer to this dilemma that THOR proposed in January of 2009 in our paper entitled “THOR’s U.S. Economic Revitalization and Corporate Responsibility Plan” (i.e. The THOR Plan).  We think that the corporate tax rate should be lowered, but only for those companies that adhere to needed changes in executive and board member pay.  It would be voluntary, but if companies don’t make changes to executives pay, they would be subject to a higher tax rate.  We believe that if the plan was implemented almost 6 years ago, the economy would be healthy now.  The plan was relevant back then and it is today as well.  Below is a summary of our plan.

Why do we need Lower Corporate TAXES?

The U.S. currently has the second highest corporate tax rate in the world – Japan is number one.   Also, as Bill Clinton noted in the quote at the top of the newsletter, we are the only OECD developed country that taxes corporations on the difference between what they pay overseas and the current U.S. tax rate.   That is if they repatriate those earnings back to the U.S.  So, US companies have a tax incentive to grow and leave their capital overseas while foreign companies have an incentive to keep their operations in the U.S. lean and mean because any operations here is taxed at the U.S. high corporate tax rate.  This certainly is NOT a recipe for growth.

Lower the corporate tax rate to 15%

A reduced corporate tax would make America more competitive.  A corporate tax rate of 15% would not be the lowest rate (Ireland would retain that distinction at 12.5%), but low enough to attract foreign capital to the US.  The Plan uses a “carrot” approach in that the Plan is optional.    Companies that believe it is worth paying higher salaries and benefits to just a few executives can keep paying these salaries, but they will continue to be subject to the current higher corporate tax rates.  The shareholders will ultimately decide if the executives are worth paying higher corporate taxes.  If shareholders began to shun the stock of companies which didn’t take the “carrot”, it is likely that changes would be made to enhance shareholder value, not executive net worth.

The benefits of a lower corporate tax rate would be:

1. Federal tax receipts will increase as the economy recovers and grows.

2. Employment will rise as the U.S. becomes among the most competitive places to invest.

3. Payroll taxes would rise as employment rises.

4. Unemployment costs to the federal government will fall as employment rises.

5. Faster GDP growth as benefits of lower taxes are reinvested in companies or paid out in dividends.

6. U.S. companies will repatriate foreign earnings back for investment in the U.S.

7. Companies will have more money to invest in infrastructure and employees.

8. Using debt as a source of funding will be less attractive.

9. As the U.S. grows faster, foreign companies will invest more money in the U.S. economy.

10. Net effect to government would be higher revenues that could be used for debt reduction and/or additional programs.

Changes to executive pay

In 1979, the average CEO pay was 35 times the average worker pay.  The average CEO pay has continued to rise overtime to 71 times in 1989, 126 times in 1993, 275 times in 2007 and then to a whopping 343 times in 2011!  Executives are doing better now than before the crisis while the average American has seen a drop in real income by over 10% since 2008.  The Democrats make a compelling argument that lowering corporate taxes will only benefit top executives.  The THOR Plan addresses this disparity.  In order to take advantage of the 15% corporate tax rate, the company would have to adopt the following changes to executive pay

1)      Tie executive pay to “average worker” pay.   They can get a pay raise if the average worker pay increases as well.  We have a detailed formula in The THOR Plan.

2)      Eliminate all options, deferred compensation plans and special executive retirement plans for top executives.

3)      Eliminate golden parachutes and severance packages for executives.

4)      Make a significant portion of executive pay be in the form of restricted stock.

5)      Restricted stock must be held for five years for preferred tax treatment.

6)      Restricted stock subject to disgorgement if executive found guilty of corporate malfeasance.

In addition to executive pay being changed, pay to board members must also be changed.  This is to ensure that corporate decisions are in the best interest of shareholders, not board members or the executives.  These are the changes we proposed:

1)      Eliminate all options and deferred compensation programs for board members.

2)      Tie pay to average workers pay using similar formula as executives.

3)      Since board members are there to protect shareholders, a higher percentage of their pay would be in the form of restricted stock than even the executives.

The Federal Reserve has tried to kick start our economy with several rounds of QE that have kept rates artificially low for too long.  The Federal Government needs to step up and provide a growth vision for the future.  We here at THOR believe that if The THOR Plan was adopted today, the economy would be stronger, average workers pay would increase, divisions between the have’s and have not’s would diminish and the debt burden of states and the Federal Government would be reduced.  For a complete copy of the THOR Plan, please visit our website or contact us at jgore@thorinvestment.com.